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Gold And Silver - Current Decline Not Over - Watch Market Activity For Turnaround

By: Michael Noonan | Saturday, February 16, 2013

We often make a distinction between buyers of physical precious metals, [PMs]
and buyers of futures, exhorting the former to buy with impunity, and some
may see that as cavalier, given how the price for both gold and silver have
been in recent decline.

The point for buyers of PMs is for both protection and creation of wealth.
Protection against insidious central bankers destroying currency-purchasing
power, over time, and wealth creation as evidenced by those buying PMs over
the past decade and seeing the intrinsic value grow dramatically.

Buyers of the physical as less price sensitive and view current declines as
opportunity to add more. As an example, we still hold physical silver purchased
when price was in the mid-40s. Has the relative value declined? Absolutely.
Concerned? Absolutely not. It remains a matter of time when the price of PMs
will go dramatically higher, and the concern will not be how much one paid,
$1800 or $1600 the ounce for gold, or $45 or $30 the ounce for silver. The
concern will be over having any at all.

If gold is to go to $3,000, $4,000 $5,000, or wherever, and silver go to $100,
$150, or $250, there will be many who will be glad to have paid $2,500 the
ounce for gold, and $75 the ounce for silver. How does that compare to $1,800
and /or $45 purchases for physical PMs, at this point? One cannot always time
the market, which is why consistent buying over time is strongly recommended,
but one can determine whether to be an owner of PMs, or not.

The problem moving forward is fear of central bankers changing the rules and
precluding the purchase of any PMs by the public, at any price. Death and
taxes are touted as the two things one cannot escape, [not always true for
the latter], but the certainty of lies and deception by central bankers/planners
runs an immediate third place.

The handwriting is on the wall, as most in PMs know only too well. We mention
this for those on the fence, those waiting for "bargains," [misplaced values,
there], and those who have not yet purchased any PMs. Do not wait, do not
wait, do not wait!

For futures, while most everyone is of the mind that manipulation is showing
a steady hand in PMs markets, that "hand" is losing its grip. It is the charts
that show what the market has to say about what those who are participating
are saying about their decisions. A not so simple statement, but one that
says, watch developing market activity to know what is going on.

That is always our purpose.

While ongoing efforts are being made to suppress the price of PMs and discourage
their purchase, mostly in futures markets, the "Discouragees," [central bankers,]
have been net buyers of gold for a few years now, after having been sellers
for so long, so do not go by what central bankers say, [often voiced through
the puppetmeisters on daily financial "news" programs], go by what they do,
only in this area. Ignore them, otherwise.

The larger picture for gold is as bullish as ever. We provide two strong facts
to confirm why, on the monthly chart. Bullish spacing is referenced as such
because it shows the degree of eagerness of buyers in a market. It is measured
by noting the last swing high and the last swing low. Typically, markets retest
previous swing highs. When buyers are so intent on being long in a market,
they do not wait to see if a retest of the last swing high will be successful.
Instead, they, [and by "they" we mean smart money participants, or controlling
forces], just keep buying breaks, creating a space that is bullish.

Another and related measure is the extent of a break, or market "give-back," in
a reaction after a rally. Monthly charts are more controlling than the lower
time frames, so the information you can glean from them is more reliable and
more pertinent. You can see how the current break since the September 2011
high has been relatively shallow when compared to from where the rally began.

Despite the "daily grind lower," recently, the larger focus is very strong.
Very strong.

A trading range is where smart money operates to accumulate or distribute
their positions. Controlling market forces require time to acquire positions
so as not to disrupt their attempted "sleight of hand" buys/sells during the
process, and the TRs are also used to discourage participants from following
them.

We said last week that $1600 was a possible target, and it was reached on
Friday. Will that area hold? "NMT." Need More Time to know that answer.

Points 1 and 2 form an upper supply channel line, and a further line down
is marked by dashes to show how it extends into the future, well ahead of
price activity. Point 3 is the low is between points 1 and 2, and it is from
there that a horizontal line, a demand line, is extended lower. It is also
dashed to show that it extends into the future well ahead of developing price
activity, to be used as a guide to gauge potential support when touched by
yet to develop market declines.

You can see how the dashed line held the December lows, and now February is
retesting it, again. There is no evidence yet of a turnaround, and it does
take time for a market to turn.

The most interesting aspect of the daily chart happens to be the last bar,
Friday's activity. It is a wide range bar lower, a sign of EDM, [Ease of Downward
Movement], indicating sellers are in control. The sharply higher volume is
a red flag, a point in time for which one needs to pay close attention, moving
forward.

Remember, sharp volume increases are usually smart money either pushing a
market even more, or starting to take the other side in a transfer of risk.
Subsequent developing market activity usually indicates which. This volume
day prompted a look at intra day behavior to see if any clues can be gleaned.

We say smart money always tries to hide their intent, but volume is something
they need in order to move or accumulate positions, and they cannot hide that.
If smart money sells highs and buys lows, where is the highest volume in this
chart? We ask, the chart answers.

The position of the close tells us buyers are more than matching the effort
of sellers to cause a rally off the low under such heavy selling pressure.
The two preceding bars of increased volume may "look" like selling, but it
is quite possible that smart money has been buying on the way down, taking
everything offered by weak-handed longs selling out and new shorts getting
in.

If Benjamin Franklin had been a trader, he would surely have said, "Never
a bottom- picker be."

Bullish spacing exists in silver, just not as strongly. We do point out how
the past five months of selling effort has not been impressive, relative to
the two month rally prior. It is like an Ali "Rope-A-Dope," taking all the
punches from his opponent, but protecting himself so not much damage is inflicted,
despite the effort against him. Eventually, he comes out stronger to defeat
his now-weakened opposition.

We show the same intra-TR channel down, just like in gold. Unlike gold, however,
silver's low has held the lows of last December, a small show of relative
strength within a negative trading environment. Still, no apparent end is
at hand in the decline of futures.

The best way to trade a TR? Not to trade it at all, instead, wait for a price
breakout and go with it. Why does that work? As mentioned, TRs are how smart
money accumulates positions. Once they are done, they then begin the mark-up
or mark-down phase, and it will last for some time, once it gets underway.

Just as a dashed line in a channel projects into the future for support/resistance,
you can see where the failed probe lower, at the end of December/beginning
of January acted as support. From there, a horizontal line is drawn. We made
it dashed to show that is was extended into the future much earlier than when
current price activity has returned to it.

Will price hold current lows? No one knows, and anyone who says otherwise
is showing an unwise ego trying to be "right," as opposed to being in harmony
with the market. Any bottom requires time in order to turn around, and any
potential turnaround always needs to be confirmed by price behavior.

The increased volume on Friday is a red flag, as it was for gold, but a red
flag means a sign or caution, to take note and see how price responds to it.
That takes time. Futures players have time, or at least the smart ones are
exercising it.

Michael Noonan is a Chicago-based trader with over 30 years in the business.
His sole approach to analysis is derived from developing market pattern behavior,
found in the form of Price, Volume, and Time, and it is generated from the
best source possible, the market itself.